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Larry Kosmont Outlines California Redevelopment Alternative

The dissolution of California’s redevelopment agencies requires the sale of 5000-6000 agency-owned properties between late 2013 and 2015. Larry Kosmont, a former City Manager and current CEO of Kosmont Companies—a real estate, finance, and economic development advisory firm specializing in public-private partnerships—walks TPR through California Redevelopment’s liquidation timeline, with advice for the private sector on the State’s impending property divestment. Kosmont, Identifying unemployment as California’s biggest “blight,” defends tax increment financing as the answer to economic development in today’s post-redevelopment era.

‘The Redevelopment Adventure that Never Ends’ was the subject you spoke to at the recent USC 2013 Real Estate Law Business Forum. On that same panel were Mayor James Butts of Inglewood, Lewis Feldman of Goodwin Procter, and Cecilia Estolano, as the moderator. Share and elaborate on your panel comments.

Larry Kosmont: The focus of my comments was that the State of California has imposed on local government a very unique asset liquidation process. This is a liquidation process not unlike bankruptcy in the private sector. The goal of this statutory process (AB1484) is essentially to strip 427 redevelopment agencies of all assets, liquidate them, and return the value to the state and the local taxing authorities, meaning every taxing agency that participated in property tax at the time just prior to the establishment of the former redevelopment agency project area.

In that discussion, I pointed out that where we are in that dissolution process—which I call the stripping process, the stripping of assets—that process started with the identification of cash assets called the True-Up payment, which was done last July. The process then moved to the housing assets, for which the audits were due October 15, then audited lists of all other non-housing assets, which were due by December 15, 2012. Also during the audit phases the various former agencies were required to identify any and all enforceable obligations (e.g. legitimate approved and active contractual commitments) that existed at the time of redevelopment dissolution. The audits and claimed enforceable obligations all require approval by the Department of Finance because they are the judge and jury in this process. The next and final step in the dissolution stripping process will be the real property sale program.

Property was the focus of the USC discussion because once former redevelopment agencies, now successor agencies (SAs), achieve what is called a Finding of Completion (FOC) they are able to complete the next and final step of the process, which falls under the ‘post-compliance’ section of AB 1484, and those are called property management plans (PMPs). Those property management plans are due within six months of the FOC. That’s where we are right now in the dissolution process, and we are about to turn the corner. Most agencies are in the process of challenging some of the disputes regarding enforceable obligations and/or assets, and the others that are not challenging are in line, hopefully, to get their FOC. After achieving the coveted FOC, the final task of the 427 SAs going through this statutory dissolution will be the property management plan.

Those property management plans represent one of the most remarkable events in public agency history—that is, the liquidation or sale of what Kosmont projects to be between 6000 to 8000 properties statewide, all likely to occur sometime by the end of 2013 to 2014 and possibly through to 2015. So over the next two years there will be a disgorgement of about 6000 to 8000 public land and property assets, and that process will begin with the filing of the PMPs, which, as I stated, are due within six months of the FOC; and we’ll be off to the races from that point on.

Larry, given the property management plans that you note will be submitted and approved in the next six months, who is likely to calling for assistance from Kosmont Companies, and what help will they be asking for?

Larry Kosmont: It’s going to be very interesting. The calls we’re already getting are from cities to produce the property management plans, and we’re doing that right now, for a number of cities. Then we’re getting calls from investors and developers asking, “When will these properties become available? Are these properties zoned? Will the city re-zone these properties? How will the city sell these properties? Do they require appraisal? What’s likely to be the payment process? What about properties that are contaminated? How are those being sold?” Those are just some of the questions that are being asked right now.

Elaborate please.

Larry Kosmont: What I’m saying is to first understand that cities lost most of their economic development and transactional staff members when the State extinguished Redevelopment on February 1, 2012. What followed in the next budget year (2102/13), which is where we are now, has been a rapid dissembling of all economic development and planning staffs throughout the state. So number one, the cities are very shorthanded to deal with these complex mandatory dissolution issues.

Number two, in part because of that, I don’t think you can expect any uniformity in how these approaches will be made on the property sales. Number three, it’s too early to tell how this process will unfold, because right now, these cities are busy just trying to get their FOCs and complete a PMP, which must be approved by the oversight board and the Department of Finance. We still have that process to go through, so I tell folks on the investor-developer side, it’s too early to get excited. In most cases, we still have some time to go.

The next thing I say is that you have to understand that of these 6000-8000 properties, there are three categories whereby certain properties can be excluded from sale, if you will. The first category is properties for government use under AB 1484. Those, as you can imagine, would be properties that comprise a city hall, a fire station, a park. The bigger question is, would that also be a public parking structure that was built by a redevelopment agency? Right now that is unknown. So despite the uncertainty of what could be placed in the category, “government use” properties can be exempted from a sale. In order to qualify, any government use claims must be approved by the Oversight Board and the DOF, as part of the PMP.

The second category of exception would be what I call the “project” category. A primary example is properties that were involved with a developer or scheduled for redevelopment that, when the music stopped, didn’t have an enforceable obligation in the form of a development agreement or some enforceable commitment. But many were very close. If the successor agency still wants to implement that project, they can make a claim based on the facts and history, so long as that project or property was mentioned in a prior redevelopment plan. So those would be what I call the economic development alternative or project exception.

The third category of exemption is properties that represent an enforceable obligation such as a long term lease, restrictive covenant, use agreement, or any DOF-recognized security interest; those properties would be conveyed to the city. So those first three categories, if ultimately approved by the Oversight Board and the Department of Finance as part of the PMP, could instead of being sold, be conveyed by the SA to the city.

All other properties will be sold. My projection is that those three “exception” categories will be in the range of 10 to 15 percent of the total properties, meaning approximately 5000-6500 properties will be up for sale essentially starting by the end of 2013.

How are you advising private sector clients to prepare for the many property opportunities that will be available in 2013-2015?

Larry Kosmont: I suggest first, that they start to understand and follow the local politics of redevelopment dissolution because there will be items appearing on various agendas of oversight boards related to property. That would be your best insight into when they may come to market and which properties are likely to be sold.

Then I would evaluate your own investment and development objectives and position your acquisition team as the most prepared buyer of those properties. Cities have minimal staff and limited resources right now, so I think the more robust buyers—those that have cash and don’t need preferential terms—are likely to do better than ones that are not in that position.

Larry, in times past you were a city manager and public servant. With that background, and given the recent dissolution of Redevelopment, what tools do localities and the state have to encourage economic development, innovation clusters, and jobs?

Larry Kosmont: That’s a great question. What does the state and its 502 cities do for economic development now? First, it seems like we are terminating these redevelopment assets in bulk, and that’s unlikely to be strategically advantageous in terms of reuse of the properties for economic development, which is mostly what was intended when these assets were acquired. Overall, California is still rated by the American Council of CEOs as the last of the 50 states when it comes to business friendliness. And with the loss of Redevelopment, the State wiped out tax increment financing (TIF) in California. So if that’s the case, what is the future of local economic development? How do cities respond to a competitive environment whereby 47 other states and Washington DC have tax increment financing that they can use for various programs to induce private investment and public infrastructure, and we no longer have TIF?

Here’s the other thing that I observe: we have roughly 10 percent unemployment in California. There are 229 cities and 42 counties with over 9 percent unemployment. I also observe that the state makes the most money from a job. If we could repurpose the tax increment financing lost as part of the death of Redevelopment toward private investment that yields new jobs, we would accomplish two things: we would put California back to work—we rank third in state unemployment right now—and we would restore the state’s general fund, because the state makes 85 percent of its money from income tax and sales tax. And the one item that generates lots of income tax and sales tax revenue is a job. When you get employed you pay income tax, and it goes 100 percent to California’s general fund. Then you take your paycheck, buy things, and 60 percent of the sales tax goes to the state.

In essence, we can use tax increment financing productively, not to solve blight as Redevelopment did, but instead to induce public and private transactions with private companies that develop new jobs—not existing jobs, but new jobs—modeled after the immigrant investor program that has been used by the federal government since 1990. That model requires ten new jobs per one million dollars invested within roughly two years, in order for an international investor to qualify for a permanent green card.

So the proposition that I’ve made to the state, that’s being carried in legislation by Nora Campos, Speaker Pro Tempore, is AB 690, which is a statewide economic development plan called the California Jobs Act. It asks the state to redirect property tax increment for jobs and infrastructure districts (JIDs). Under AB 690 JIDs would be adopted locally by cities with the stated targeted objective to reduce unemployment—say like in South Gate, which suffers from around 15 percent unemployment, to six or seven percent—and to use property tax increment funds for inducements to private companies to buy old buildings or property, and put new jobs in that revitalized facility. Also allowed is the use of TIF for both education and job training programs. Based on the Employment Development Department’s (EDD) average wage of a new job in California, for every 320,000 thousand jobs created, one billion dollars a year is generated in new taxes for the state’s general fund. The model Kosmont created for AB 690 shows that for every one dollar of property tax the state allows local agencies to invest in a job-generating projects, at a ratio of ten jobs per million invested, $110 is returned to the state in new sales and income tax. Spending a little of the property tax increment on job creation, would be a way to actually increase funding for schools, close the education-per-capita spending gap, and most importantly, a way for the governor to say, “California, I took you seriously when we borrowed money under Prop 30, and here’s what I’m going to do. I’m going to put you back to work because if you go back to work, we fix the State’s general fund and neither I nor any future Governor should ever have to ask you for money again.” Now that’s a legacy worth leaving.

So that’s really how I view the circumstances right now. If we can’t reapply tax increment in a way that fixes local government, the state, and unemployment over the long term, then this battle that we’re in of dissolving Redevelopment and fire selling properties is a road to nowhere. Especially since California and it’s cities don’t have a reliable go-forward economic development program to make us competitive.

Lastly, how might the creation of Job and Infrastructure Districts circumnavigate the risks and abuses that so many associate with what happened with Redevelopment in California?

Larry Kosmont: In Redevelopment we were solving for something called blight. I can’t, as a former redevelopment professional, tell you that blight can be defined precisely by anyone, and because it can’t, I think the question of redevelopment accountability came under scrutiny. And in some cases those questions and concerns were very appropriate.

But here’s the thing: tax increment financing is not Redevelopment! This is the mistake we make in California. Because Redevelopment was always the program whereby we used the TIF as a tool, we confused the two. By comparison, there are 47 states that use tax increment financing and don’t have a redevelopment agency. Here’s the point: we use TIF for different results, much like in medicine where we use a laser for a blemish, eye surgery, or an artery. TIF can be used for different objectives, and in AB 690 we use TIF to solve for unemployment. And the byproduct of curing unemployment is that the state’s general fund becomes healthier.

Unemployment is an easy and tangible metric. EDD puts it out every month, and we see it and understand it. When you establish a job infrastructure plan, it’s an employment plan—say a city has 15.5 percent unemployment, the plan simply states that within the next X number of years, we’d like to reduce it to six percent, and here’s our plan. It’s not a mystery. AB 690 also provides an end for the JIDs. Unlike redevelopment agencies that never seemed to finish fighting blight, a JID loses the use of tax increment once it reaches the target unemployment levels, which again is a published EDD metric. Beyond that there is a 45-year cap on a JID, and all construction jobs must be prevailing wage.

For these fundamental reasons, AB 690 is not a redevelopment bill—it’s a Jobs bill that seeks to solve what I call the new blight. I think unemployment is the blight of California, and our citizens and local communities need help, and property TIF can be a tool to restore employment levels. I get that the Governor doesn’t want Redevelopment, but I don’t see how you can say no to reinstalling tax increment in a way that puts some of the 1.8 million unemployed citizens (many of whom voted for prop 30), back to work when doing that can also diminish the need for a future version of Prop 30. The irony is that the dysfunctional reliance of our state on income tax and sales tax (85 cents of every general fund dollar) can be fixed by simply incentivizing companies to create jobs for out-of-work citizens. Raising taxes is not a way out of the State’s financial problems, but as it turns putting our citizens back to work may very well be.